Thursday, May 29, 2008

Demand Curves Slope Downward, Except in Politics

How is it that everyone complaining about high gas prices can see this simple relationship:

increased gas prices = people buy less gas [corollary: people buy more fuel efficient cars]

but they cannot see these relationships:

increased minimum wage = people buy less minimum wage labor

increased business taxes = less business

increased capital gains taxes = less capital

~Comment from Bob Wright on this CD post


At 5/29/2008 8:04 AM, Anonymous Anonymous said...

Enjoyed your original article. A well constructed and logically argued piece. Appreciate that you pointed out the implications to the U.S. economy of targetting a key industry. This aspect seems to be overlooked by politicians in search of an easy bugaboo to score a few points with voters.

Yesterday's Wall St. Journal offers some needed perspective on US fuel prices indicating gas prices in different countries in Europe where the price is close to $9.00 a gallon in some countries.

On a different note, this article regarding energy in California was interesting. It indicates the extent to which governments can exacerbate supply problems in this case electricity. For those who do not subscribe, the highlight was the conversion of a nuclear electrical generating facility which produced 900 Megawatts of electricity to solar power which now produces only 4 Megawatts.

At 5/29/2008 8:16 AM, Blogger Matt Young said...

When we raise taxes we buy less government.

This has been the case for all of time, and follows standard supply and demand.

The question is why can't you see this?

You complain about the inefficiency of government, so raise taxes and people will use government less.

At 5/29/2008 8:21 AM, Blogger Frencholivier said...

Econ 101 (like room 101), tells us that after the (supply and) demand chapter comes the elasticity chapter.

At 5/29/2008 9:16 AM, Blogger spencer said...

Wow, an eight fold increase in crude oil prices over a decade generated a 1%-2% drop in gas consumption.

Just think if you applied that price elasticity to capital gains taxes we could eliminate the federal deficit and cause interest rates to drop sharply with essentially no impact on
capital spending. As a matter of fact the lower rates might actually more then offset the negative impact on capital spending.

Do you think the Laughter
Curve impact has about the same elasticity?

At 5/29/2008 9:40 AM, Blogger Matt Young said...


I can give you one recent elascicity example. Michigan raised taxes by 1.3 billion and got a .45 billion decrease in supply of government.

It works, supply and demand, regardless of what this author says.

At 5/29/2008 10:17 AM, Anonymous Anonymous said...

increased gas prices = people buy less gas [corollary: people buy more fuel efficient cars]

Spending thousands of dollars to save hundreds of dollars is a knee jerk reaction by the mathematically challenged.

At 5/29/2008 5:44 PM, Blogger Malachi said...

Spending thousands of dollars to save hundreds of dollars is a knee jerk reaction by the mathematically challenged.

While I'm sure you could find some who fit that description I suspect that is not generally the case.

Rather, people who are ALREADY in the market for a new car are choosing more fuel efficient cars.

At 5/29/2008 5:50 PM, Blogger OBloodyHell said...

> this article regarding energy in California was interesting.
> Those things require energy, and lots of it. All the wisdom of Athens and all the power of Sparta won't change that fact.

If Cali keeps it up, they'll wind up with all the electrical generating capacity of Sparta, too.

> When we raise taxes we buy less government.

Uh, one hopes you are kidding.

Taxes aren't a voluntary expenditure, subject to the laws of supply and demand.

They're a forced expenditure. If you don't grasp that, then, next April 15th, send the IRS a note in place of your tax return, saying, "This government is too expensive! I refuse to pay for so much government, therefore I am remitting only 80% of my taxes!" and see what that gets you.

Let us know when you get out of jail how that worked out for you, eh?

At 5/29/2008 10:46 PM, Blogger Matt Young said...

We can debate volunteerism, but the author is wrong about the demand slope, the author posed the problem so as to influence the debate.

It is rare that a raise in taxes does not lead to less government.

Another factoid that economists are blind to is that government functions, though grossly inefficient, do things that otherwise would be done in the private sector. So every government expansion is less overhead for business, which is why rich people always buy more government after a tax cut.

At 6/03/2008 6:33 AM, Anonymous Anonymous said...

Matt, what in the Nine Hells are you talking about? When taxes are raised, people spend less because they can't actually afford to spend as much, which in turn leads to less revenue moving about the system and as a direct consequence less revenue from which taxes can be raised.

Rich people move their tax burden to lower-tax areas because they pay less tax there, not because they want to buy more Government- to claim otherwise is one of the silliest suggestions I've heard in quite a while.

And government functions doing things that would otherwise be done privately is by no means a good thing: The private sector would do it more efficiently, more cheaply for all concerned and only those who needed the services in question would be burdened with paying for them.

In addition, a private company performing the functions in question will be set up so as to make a profit in its own right, in the process both freeing up funds and generating additional tax revenue that the government can use either in more essential services elsewhere or- here's a thought- reducing taxes, thus enticing more businesses and businessmen into the area and improving the economy for all concerned.

It's not a matter of "using government less-" if anything, the more tax you pay, the more you should expect excellence from your government, or an entirely new government come the next election since you can't demand your money back or refuse to pay as you would with a private company (another advantage the sector offers!), so that (again) is a suggestion I can only describe as "fanciful" while remaining charitable.

At 6/04/2008 11:05 AM, Blogger Matt Young said...


As you claim, having companies do things for themselves rather than have government do them is a good thing.

But, as Laffer pointed out, government does much less when one can raise the cost of government services, especially if one can raise them above the dead weight losses that government incurs.

Would companies move out to locales with more efficient governments?

They sure would, and that is not necessarily a bad thing, mobility is a key to efficiency.

Some companies would raise their expenses, to reduce net and taxes, and that is a good thing because that is part of the equilibrium process of doing for themselves what government would do.

You can make all the moral arguments that you want, but your are still stuck. When you raise prices, legislatures invariably cut services.

You are mistaking dead weight losses for some violation of supply and demand, the original author did the same.


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